Resurgence of international equities has ‘room to run’

A transition away from U.S. dominance is increasingly underpinned by structural changes that favour international equities, says Isabella Giordano of J.P. Morgan Asset Management.

She said investors with globally diversified portfolios have reaped the rewards over the past year and a half.

“Last year, we saw international equities outperform U.S. equities by about 14%,” she said. “And we’ve seen that outperformance continue into this year as well.”

Speaking on the Soundbites podcast, Giordano said three factors — currency, valuations, and sentiment — are creating opportunities in Europe, Australasia and the Far East (EAFE).

“It’s valuation setting the stage, sentiment driving flows, and currency adding incremental support, with earnings now starting to validate the move,” she said.

Currency

Giordano said a softer U.S. dollar is turning from a headwind into a tailwind for global equities.

“Last year, the U.S. dollar was down about 9%,” she said. “And even with the dip we saw last year, the U.S. dollar still looks fairly overvalued versus its long-term history.”

She expects the dollar to continue to weaken gradually — on average, about a 1% annual devaluation over the next decade.

Valuations

Despite strong returns for international equities, valuations remain meaningfully discounted versus the U.S. — about 32% by some measure, compared to the long-term average discount of about 19%. This discount is seen across all sectors, she said, and there’s still room to run.

“For those considering whether or not to increase that allocation, the natural next question is, Have I missed the boat? For what it’s worth, we certainly do not think so,” she said.

Sentiment

Most importantly, sentiment is shifting as Europe flexes its fiscal muscles and Japan pivots toward corporate reform. Earnings, she said, are now beginning to validate that shift.

“This is really what I view as the biggest catalyst to continue to help close that valuation gap,” she said.

“From a cyclical perspective, the U.S. has had an extraordinary run, driven mainly by mega-cap tech and AI-related stocks. We’re now seeing a mean reversion phase where under-owned regions like Europe and like Japan are benefiting.”

In terms of stock picking, she likes real-asset and infrastructure-linked businesses tied to electrification and fiscal spending.

Among consumer brands, she’s bullish on those with pricing power and visibility.

And when it comes to the busy — and potentially confusing — AI space, she favours “adopters” over “enablers” across industrials, healthcare and consumer sectors.

“As prior capex begins to translate into real deployment, we see the next beneficiaries as companies best positioned to integrate LLMs and agentic AI into workflows,” she said.

She cited companies like:

• Sony, which is using AI to improve game development productivity;
• Hitachi, the Japanese electrification company embedding AI into their rail signalling business;
• The clothing brand Next, which is using AI to improve its inventory management;
• Insurance provider Munich Re, which is using AI to better analyze its proprietary data;
• U.K.-based information analytics company RELX; and
• London Stock Exchange, which owns a trove of high-value market data.

“We’ve trimmed or exited software exposures where we think the range of outcomes is very wide and the business model could be a bit more vulnerable,” she said. “Where we have kept exposure is in more walled garden data businesses.”

Taking advantage of the ongoing shift toward global equities relies on diversification, active management and, above all, investor tenacity, she said.

“Stay invested through the cycle. If you’re waiting for the ‘all-clear’ you often miss a meaningful portion of the rebound,” she advised. “Staying invested with the right mix keeps you participating when leadership changes.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.